The Fed is preparing to raise interest rates again. Is it enough to get away from stagnation?

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  • The Fed is expected to raise interest rates by 0.25% today, bringing the target to 4.75%.
  • Inflation is already showing signs of slowing, so the Fed now risks rising interest rates causing a recession
  • The changing global economic landscape means that the Federal Reserve may need to reconsider raising interest rates sooner than planned, and we could also see cuts in the not too distant future.

The Federal Reserve meeting is taking place this week, and an interest rate announcement is expected later today (February 1). If a quarter-percentage-point increase is as expected, all signs point to a slowdown in the rises.

The global economic situation has changed since the Fed first pursued a cat-and-mouse chase of red-hot inflation. China is reopening, gas prices are falling after a mild winter and the International Monetary Fund’s call to avert a global recession has been predicted.

While a slowdown in hawkish monetary policy may sound like a good thing, the Fed is now facing a fine line between inflation and recession – and assessing the impact of the massive interest rate ladder from 2022.

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Here’s everything we know before the announcement so far.

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What is expected to happen?

Analysts widely expect the Fed to announce a 0.25% increase in interest rates, bringing its target rate to 4.5%-4.75%.

A positive sign of caution is how much the basis point has risen. If the Fed raises interest rates by 25 basis points, it will be the third time in a row that it has pressed its increases.

The President of the Federal Reserve Bank of New York, John Williams, has He said In recent weeks, it is said that “it will take time for supply and demand to return to proper alignment and balance” and that the Fed needs to “stay on course”.

What happened at the last meeting?

The latest announcement in December saw the Fed pick a half-point increase, marking the seventh increase of 2022 and the highest in fifteen years. interest levels Currently sitting in the 4.25% and 4.5% target range.

What was notable at the last meeting was the breaking of the 75 bps streak higher. While the Fed has been playing catch-up for most of 2022 as inflation has climbed to its highest level since the 1980s in the US, peak At 9.1% in June, it eased to 6.5% in December last year.

The Fed is focused on avoiding a recession, as long as it can also bring down inflation, too. Pessimists will look at the parallels between what’s happening now with ultra-low interest rates and the 2008 financial crisis, but experts are cautiously optimistic about the global economy in 2023.

What are other countries doing?

Raising interest rates in the United States is not in line with the rest of the world.

Obviously, the European Central Bank (ECB) is considering the 50-point rate more We’ll know more on Thursday. Christine Lagarde, President of the European Central Bank, has repeatedly stressed the need for steady increases in interest rates to tame rampant inflation.

In the UK, the Bank of England is also planning to raise interest rates to the expected 4%. If he continues, it will be a tenth increase in the base rate in a row.

Interestingly, the Bank of Canada raised interest rates by 25 basis points higherBut it has now said it will “keep the policy rate at its current level while it assesses the impact of cumulative interest rate increases”. We could see major economies doing the same – including the Federal Reserve.

Could we see more rate hikes in 2023?

When inflation started to spiral out of control, it was clear that interest rates needed to be raised to try. The Fed has it previously referred to The US may see interest rates rise from 5% to 5.25% until 2024 before they start to fall again.

This is all in the name of bringing inflation back to 2%, which Fed Chairman Jerome Powell has stated several times to be the ultimate goal of the Fed’s monetary tightening policy. Unfortunately, Powell pointed out Back in August, this goal was “bringing some pain to families and businesses.”

But things have changed since then. The core PCE price index, which is the Fed’s measure of making these big decisions, registered 4.4% in December from a year earlier. November registered 4.7%, so, by all accounts, inflation is trending downward.

What did the IMF report say?

The doom and gloom of news reports has pervaded in recent months. However, the latest report from the International Monetary Fund this week has added some much needed positivity after raising its forecasts for almost every major economy. The UK was the only one expected to shrink.

Their latest report brought growth in the US to 1.4%, up from 1% in October last year, and indicated that we wouldn’t see a global recession just yet. As expected.

Are we out of the woods? not yet. The International Monetary Fund still expects the US to barely expand in 2024, and unemployment rates are set to peak at 5.2%. However, no one expected a positive outlook from the IMF on the global economy at this point.

Will there be an American recession?

All the Fed has done since 2021 is push the US away from the brink of a deep recession – but the mixed economic outlook does not make the way forward easy.

JPMorgan Asset Management’s chief global strategist, David Kelly, recently told Bloomberg that the Fed has won its war against inflation and that rising interest rates threaten an economic collapse. Wharton University Economics Professor Jeremy Siegel warned Over the weekend “we should not get more than 25 basis points. 50 would be a disaster, I think.”

Even the infamous billionaire Elon Musk has weighed in on the matter, Twitter Last November, he said the Fed “needs to cut interest rates immediately” and that it “dramatically exaggerates the possibility of a severe recession.”

So it was economists, analysts and business leaders who focused on the crisis. While interest rates are not expected to exceed a quarter of a point, the move could still cause some panic.

The broader effects of last year’s rate hikes are also beginning to emerge. Personal spending fell 0.2% in the US between November and December, while the housing market declined refrigerated As buyers were grappling with more interest to pay their mortgages.

We may see the Fed have to change tactics again so that it can continue walking the delicate tightrope between inflation and recession, but not without more data first.

bottom line

The next 12 months seem a bit uncertain at the moment. There aren’t many analysts predicting big market drops or a deep recession, but by the same token there isn’t anyone predicting sunshine and rainbows either.

Realistically, it’s likely to be a year in which some companies do well and some not so well, and economic data is likely to be mixed as well.

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